Reviving Cook Islands' Tourism Industry

The Cook Islands is opening its borders once again, ready to revive post-pandemic its tourism industry, which had been a critical and increasing part of its economy. In 2012, the industry accounted for 43% of the country’s gross domestic product (GDP), and this grew to 61% in 2019 right before the pandemic.

In 2020, however, the tourism sector collapsed as the country closed its doors to prevent the entry of COVID-19. The Cook Islands may have avoided the virus this way, but the closure caused visitor arrivals to dwindle and tax collection to fall by about 42% in 2021. It also caused the country’s GDP to decline by 5.9% in 2020 and to an even greater depth, estimated at 26%, in 2021.

To revive the tourism industry, the government worked to reopen its borders in 2021. But while the country’s temporary opening in May 2021 showed that the economy could recover its immediate losses, sustainable recovery remains uncertain. Travel with New Zealand recommenced in January 2022, but other challenges still limit the country’s growth. Apart from potentially new virus variants, traditional constraints such as a small population, fiscal challenges, and private sector limitations hinder the country’s economic recovery.

ADB, the Asian Infrastructure Investment Bank (AIIB), and the Government of New Zealand teamed up to help the Cook Islands recover from the severe economic impacts of COVID-19 and address other challenges that limit the country’s recovery and economic growth. ADB and New Zealand, through the Supporting Sustainable Economic Recovery Program, provided the country with the funds it needed to meet its immediate and medium-term financing needs for COVID-19 response, public sector operations, services to vulnerable households, and private sector recovery. This is additional to the ADB COVID-19 Active Response and Economic Support Program from 2020, supported by the AIIB and New Zealand, to finance the initial COVID response and countercyclical spending.

This partnership is crucial as it ensures that the Government of the Cook Islands does not run out of cash. ADB is the only multilateral creditor that can provide budget support. The country has no access to international credit markets, lacks developed local financial markets for government debt, is not a member of the International Monetary Fund nor the World Bank, and does not have a central bank to provide emergency assistance.

The COVID-19 support to the Cook Islands provides training for frontline health workers, protective equipment, and the conversion of hospital wards into special negative-pressure isolation facilities to manage infectious disease patients. The program also provides lifeline support to workers and the poor with wage subsidies that allow businesses to continue and protect laborers from being laid off.

– James Webb, ADB public sector economist

Immediate Recovery and Long-Term Growth

Lifeline support

Tax receipts in 2020 and 2021 were 28.2% and 21.2% of GDP, respectively. On the other hand, expenditures rose from 49.5% of GDP in 2020 to 72.7% in 2021. This led to a $16 million fiscal deficit in 2020, which was supplemented by government cash reserves. However, the $93.4 million deficit in 2021 is another story—this gap is too huge for the government to fill. To help the country recover from this steep fall, the government relied on a $40 million policy-based loan (PBL) and a $40 million precautionary financing option (PFO) loan from ADB. The PBL will help the country meet its immediate financing needs for 2022 as the economy recovers. But if the pandemic lingers, more adverse economic impacts may still be forthcoming. If the economy falters further, the PFO will kick in.

The PBL supports ongoing government fiscal reforms while mitigating the impacts of COVID-19. These reforms, designed to restore the fiscal stability badly needed for the country’s immediate recovery and long-term economic development, focus on policy actions to improve fiscal management, cash strategy, tax compliance, and audit reporting.

While broad fiscal management reforms are implemented, the project is also supporting the country’s COVID-19 medical response and preparation as well as lifeline support to workers and the poor designed to foster speedier economic recovery by keeping employers and employees linked up.

“The COVID-19 support to the Cook Islands provides training for frontline health workers, protective equipment, and the conversion of hospital wards into special negative-pressure isolation facilities to manage infectious disease patients. The program also provides lifeline support to workers and the poor with wage subsidies that allow businesses to continue and protect laborers from being laid off. It also includes unemployment benefits for those who lost jobs, are actively seeking employment, are ready and able to work, and are not receiving the wage subsidy,” said James Webb, public sector economist, ADB.

Kickstarting growth

The country aims to tap the power of the private sector to propel its economy. However, the size and remoteness of businesses and the absence of a conducive business climate are major hindrances to sustainable growth. Tourism was the country’s top earner, but COVID-19 ran it aground. So, to kickstart growth, the government introduced policy actions designed to drive private sector growth and competition. These encompass changes in border management, migrant worker permits, immigration, online business registration, competition regulation, and telecommunication.

Reforms in border management prepared the country for quarantine-free travel, primarily with New Zealand, where lies its biggest client base. It also improved COVID-19 messaging, introduced a contact-tracing app, trained frontline staff in COVID-19 response measures, and managed the public alert levels for community responses. These changes ensured that disruptions to border and COVID-19 management are resolved quickly.

The government also made work permits flexible for migrant workers to take on new or second jobs without leaving and reentering the country. This measure gives migrant workers mobility, reduces hiring costs, and helps businesses meet labor shortages. All permit fees were also waived to reduce business costs further. It also improved access to online business registration measures, enabling entrepreneurs to access data and registry services 24/7 without the use of lawyers or other proxies. This facilitates risk assessments and lending services for businesses. Reforms meant to disable monopolies were also implemented in the telecoms sector. As a result, more players in this arena will be favorable to businesses. Competition can push better services and lower prices for both enterprises and consumers.

On the Road to Sustainability

The project looks forward to early fruits by the end of 2022. The fiscal reforms this initiative laid out will help maintain public debt below 65% of GDP and government cash reserves above a month of government expenses at the start of each month. They will also reduce tax arrears by at least 15%. This healthy fiscal balance will enable the country to meet its immediate COVID-19 response targets and eventually recover.

Through its fiscal measures, the government has laid out reforms that stimulate the growth of both labor and business. The seeds of this growth lay in the provision of government income support to about 4,000 individuals, wage subsidies to at least 2,000 workers, 1-month unemployment benefits to 100 persons, and emergency hardship funds to households not covered by other subsidies amid the COVID-19 crisis. The government also provided economic relief to businesses through cash grants, liquidity support, and an interest relief program.

The policy actions the Cook Islands implemented are expected to revive the tourism industry. Beyond that, they will also lead to a thriving private sector and a growing, more responsive human capital. This expansion in human and business capital will be the country’s foundation for a more sustainable and inclusive economy.